The responsibility rests on parents' shoulders. Here's some concrete advice.
Most parents would just do about anything to ensure that their children have the skills to succeed in life. They help out with homework; tirelessly haul the little buggers to a slew of after-school programs; and enthusiastically embrace "teaching moments" to help them learn to manage frustration, disappointment and fear.
But are they teaching their kids how to be financially responsible adults?
Many are not. Last year, more than 65% of participating high-school seniors failed an exam focused on the basics of income, money management, saving and spending, given by the Jumpstart Coalition for Personal Financial Literacy. The categories of money management and savings yielded the fewest number of correct answers, a mere 45.4% and 41.0%, respectively.
Worse yet, many parents freely admit that they do a poor job on this front, according to a survey by Northwestern Mutual, the Milwaukee-based financial services company. Northwestern reported that nearly 50% of those surveyed said they don't set a good example for their kids when it comes to handling money. In fact, fewer than 40% of parents said they talked about credit cards, debt or family finances with their children.
"If you ask people 'where did you learn about money and get your habits on savings and spending?' the majority will answer, 'We learned from our family,'" says Meridee Maynard, vice president at Northwestern Mutual. "And if you follow up, most will then say, 'But we didn't learn much."
It's possible, of course, that your child might get a meager education in financial literacy through the schools or some other outlet. But, according to the National Council on Economic Education (NCEE), an independent nonprofit dedicated to increasing financial education for students in grades K-12, only seven states — Alabama, Georgia, Idaho, Illinois, Kentucky, New York and Utah — require that high-school students complete a course in personal finance.
"You either learn it from parents or teachers, or you learn it the hard way," says Robert Duvall, president and chief executive of the NCEE, which last month released its biennial survey of the states. "Financial literacy is learned behavior. You're not born with it."
The good news: Even if you secretly know that you could use a lesson or two on the finer points of personal finance, that doesn't mean you can't raise financially savvy kids. For added motivation, consider that the smarter your kids are about money, the less likely they'll hit you up for cash when they enter adulthood.
Financial education can begin for children as young as five-years old, with, say learning to save in a piggy bank. (Use one that's see-through so kids can watch their savings grow, say experts.) But the sweet spot is with kids slightly older, say in the 7- to 12-year old range, when they can handle more abstract ideas. At this age, the NCEE suggests, parents should address five basic concepts with their kids: earnings, budgeting and planning, saving and investing, handling credit, and banking.
Do your kids earn an allowance? If they don't, it's time to put them on the family payroll.
Keep in mind that this isn't charity. Your kids should work for their keep, says personal finance guru Suze Orman, author of "Young Fabulous & Broke." Getting paid for household chores like keeping their room clean or making their bed each day instills in children a good work ethic. And having some disposable income opens the door to numerous other personal-finance lessons, like saving and spending (below).
Budgeting & Planning
The idea of helping your 7-year-old create a budget might sound absurd — assuming you aren't planning on hitting up junior for his share of the monthly electric bill.
But an allowance necessitates allocation decisions. A budget teaches that managing money is all about making decisions on how best to utilize limited resources, says Duvall.
The budget can be simple, but it should dictate where the money will go. Out of a weekly allowance of $5, maybe $2 goes into savings, while $3 is spending money. Will that be $1 for candy and $2 for comic books or $3 for a toy? There are some helpful Web sites that offer talking points for parents and games for kids, including Northwestern's Themint.org, Cyberchase.com and Jumpstart.org and NCEE.net. Savings
If your child is like most, chances are he already has his young consumer eye trained on numerous items. Teaching your child to prioritize and save for what he or she really wants is an essential lesson best learned young.
Start by having your child draw up a list of the things he wants most, says Duvall. Next, engage in a little consumer research by helping him to look in newspapers, on the Web or in stores to discover how much things cost. Then, help your child prioritize his savings goals. And remember, this is his goal, not yours: Assuming it's within reason, let the child purchase what he wants.
Sharon Zimmerman, a 42-year-old mom in Santa Rosa, Calif., talks a lot with her 10-year-old son Preston about the balance between instant and delayed gratification. She helps him wrangle with the weighty decisions like whether to buy the cheap $2 toy or save for the $30 videogame.
Over time, Zimmerman has watched her son become savvier on this front. When Preston first began earning his allowance at age 5, he often spent the money on cheap things that didn't last long. Zimmerman didn't interfere, but suggested that this perhaps wasn't money well spent. "You have to keep talking about it," says Zimmerman. "If they use the money on something cheap that breaks, it was their money they spent unwisely. (That) will reinforce the conversation next time, when you suggest 'Maybe you don't want to spend it on this toy and instead save for something bigger.'"
She says the hardest thing for the parent is to let the child make the mistakes. "But they get the concept, because they are learning the hard way," says Zimmerman. "And I would rather let them make mistakes with a small allowance than when they are in the real world."
Credit & Borrowing
While handling credit might be too abstract for young children, Duvall says parents can teach the concept of borrowing when the child is saving for an expensive toy. After the child has saved half the amount of the toy she wants, allow her to borrow (if she so chooses) against her future allowance to make up the difference. If it took, say, five weeks to save 50% of the necessary cash, explain that over the next five weeks she will have to pay back to the parent the savings portion of her allowance. Duvall recommends adding an extra week to teach the cost of interest.
Tough love? You bet. But better that little Jane learn about the mechanics of paying down debt from you, now, than from a credit card company later.
Even a child as young as 10 years old can — and should — have a bank account, to learn the basics of interest and writing checks, and to gain a sense of financial responsibility.
Elizabeth Haynie, a 38-year-old mom from Massapequa, N.Y., was surprised at how opening up a savings account transformed the thinking of her 11-year-old daughter, Jennifer. Before the account, Jennifer would spend gift money on toys. But once she deposited her money in a savings account and was told to manage it, she decided she didn't want to deplete it with frivolous purchases. "I think it gave her a real sense of security to know she has $500 in the bank," says Haynie.